How to Profit From Next Week’s Earnings Disasters

5 stocks waiting for investors to short on bad news

Investors pivoted from a hotly contested presidential election to the fiscal cliff and other pressing concerns like a stagnating economy. The stock market collapsed by a hefty 2% the day after the election.

Is this just some long overdue profit-taking or worse?

If third-quarter earnings are any clue, we could be in big trouble.

Companies across the spectrum are reporting mostly disappointing results. I’m seeing misses on the top line, misses on the bottom line and downward guidance for the future.

It does not get much worse than that. Even companies that are reporting good news are being punished in the market because of the slightest blemish.

Spectacular gains from big moves

It is not a happy time for investors, but Earnings Players don’t fret. Instead, learn to profit from the big moves that can come from earnings reports with a short-term — one day to be exact — option trade. The gains can be spectacular.

The question is where to find these little nuggets. Well, that’s my job. I’ve identified a number of companies that are reporting earnings next week that could be headed for disaster.

Here they are all wrapped in a bow, just in time for holiday season:

1) Cisco Systems

The networking company reports earnings for the quarter ending Oct. 31 on Tuesday after the market closes and Wall Street expects Cisco Systems (NASDAQ:CSCO) to report earnings of 46 cents per share for the quarter. That estimate has held steady over the last 90 days. Cisco has exceeded estimates in each of the last four quarters. Shares of Cisco have fallen by 5% in the last year of trading. Analysts expect the company to grow profits by 5% in the current fiscal year ending July 31, 2013. At current prices, shares trade for nine times current fiscal year estimated earnings.

The world of computing is changing. The smart phone and tablet computer is taking over. Everything seems to be going mobile. Will Cisco be able to adapt its business model to the new world? That question is very much in play for investors. As such, it makes no sense to pay a premium valuation for Cisco today. Look for shares to adjust lower as more evidence of the titanic shift in the industry negatively impacts Cisco’s earnings.

2) Dick’s Sporting Goods

The sporting goods retailer reports earnings for the quarter ending Oct. 31, 2012 on Tuesday before the market opens. Wall Street expects Dick’s (NYSE:DKS)to make 37 cents per share in the period. That estimate is a penny per share higher than 90 days ago. Dick’s has bested estimates in three of the last four quarters. Shares of Dick’s have gained 30% in the last year of trading. Analysts expect it to grow profits by 14% from the current year to the next. At current prices, shares trade for 20 times current year estimated earnings.

Retail stocks have been the stars of the market thanks to a stronger-than-expected consumer. Spending from savings might not be a big deal in the short term, but it sure is in the long term and that’s exactly what has helped retailers in the short term. But this state is not sustainable. Certainly there are some favorable headwinds, including QE Infinity, but prices of stocks in the retail space are at a peak. Look for Dick’s to report OK earnings, but OK will not be enough to keep the stock at current levels.

3) PetSmart

Look for the pet retailer’s earnings report for the quarter ending Oct. 31 on Wednesday after the market closes. Wall Street expects PetSmart (NASDAQ:PETM) to make 63 cents per share in the quarter. That estimate is 2 cents per share higher than where the number stood 90 days ago. Shares of PetSmart have gained 44% in the last year of trading. Analysts expect the company to grow profits by 12% from the current fiscal year ending Jan. 31, 2013 to the next. At current prices, shares trade for 20 times current fiscal year estimated earnings.

There simply is nothing more that needs to be said in regard to PetSmart, but if you insist, I will lay it out for you. For starters, I get the affinity for our pets, but to spend feverishly on furry creatures during a painful recession makes little sense. Yes, consumers have shown no impulse to slow spending in this area, but that time will come soon enough. From a valuation standpoint, PetSmart is very expensive relative to expected growth. This one is a no-brainer. Put buy in advance of PetSmart’s earnings report on Wednesday. Rational heads will prevail and the stock will go lower.

4) Applied Materials

Thursday is the day Applied Materials (NASDAQ:AMAT) expects to reports earnings for the quarter ending Oct. 31, after the market closes. Wall Street estimates the semiconductor maker to report 3 cents per share in the period. 90 days ago the estimate was for a profit of 12 cents per share. Applied Materials has exceeded estimates in each of the last four quarters. Shares of Applied Materials have dropped by 14% in the last year of trading. Analysts expect profits to be flat in the current fiscal year ending Oct. 31, 2013. At current prices, shares trade for 14.5 times current year estimated earnings.

The semiconductor space is in a bit of disarray. Analysts are having a tough time pegging earnings. That creates a ton of uncertainty and volatility when earnings are actually released. In the case of Applied Materials, it is pretty safe to say that the odds favor a downside surprise here. The macro and micro environment are conspiring against the company. With shares trading for a double-digit multiple of earnings and profit growth nonexistent, this one is a put play if I ever saw one.

5) Dell Computer

Dell (NASDAQ:DELL) is scheduled to reports earnings for the quarter ending Oct. 31, 2012 on Thursday. Wall Street expects the PC maker to report a profit of 40 cents per share in the quarter. 90 days ago the estimate was that Dell would report earnings of 49 cents per share. Dell has missed estimates in two of the last four quarters. Shares of Dell have lost 40% of their value in the last 12 months of trading. Analysts expect profit growth to be anemic from the current fiscal year ending Jan. 31, 2013 to the next. At current prices shares trade for five times current fiscal year estimated earnings.

The personal computer is dead. Will the same hold true for personal computer maker, Dell? It would be a sad story indeed, but where in the market will this company be relevant? I just don’t see it. It may take years for the collapse to unfold, but with each quarterly earnings report, Dell is one step closer to death. Play this one short each and every time it reports until it files for bankruptcy.